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The Australian Renewable Energy Agency (ARENA) and the Australian Energy Market Operator (AEMO) today jointly announced plans to pilot a demand response initiative this summer to manage electricity supply during extreme peaks.

The three-year program is to be trialled in South Australia and Victoria to free up temporary supply during extreme weather and unplanned outages.

Initially, this pilot program will aim to secure 100 megawatts of demand response capacity by next summer, with the potential for demand response to be scaled up in subsequent years.

ARENA expects to commit up to $22.5 million over three years to fund the pilot, based on an assessment of the current market.

ARENA and AEMO will today hold a workshop with industry stakeholders to consult on the proposed scheme.

"We need to find new, smarter ways of coping with spikes in demand and volatility as we move towards an electricity system with more variable renewable energy supply.

"Instead of building a power plant that is only switched on a few hours or days a year, demand response will allow us to reduce energy consumption during peak demand while also reducing energy costs and emissions for consumers. It’s a win-win," he said.

"Demand response is an efficient way of supporting integration of renewable energy, without compromising security and reliability," Mr Frischknecht said.

"Initially, we are seeking to fund demand response to make available temporary supply during system-wide emergencies. In the future, demand response could also be used to smooth out frequency disturbances, network disruptions or price peaks," he said.

Under the program, energy users who subscribe will receive incentive payments to be on standby in emergencies or peak demand days funded by ARENA.

During an emergency or extreme peak, those who participate could be called upon by AEMO to switch off or reduce their electricity use temporarily, and would receive a further compensation payment.

"The simplest way to encourage people to use less energy at short notice is to provide a financial incentive," Ms Zibelman said.

The program is expected to be open to demand response aggregators, large industrial and commercial users, battery storage and smart thermostat companies and will involve both commercial and residential consumers.

"We are looking to test a range of technologies and approaches to deliver the most cost-effective outcome," Mr Frischknecht said.

"Those who choose to participate in demand response schemes will be helping to make better use of existing infrastructure, including generation and transmission assets. This will help to reduce emissions and energy costs, putting money back into the pockets of consumers and businesses while improving energy productivity," Mr Frischknecht said.

Demand response is in line with ARENA’s new investment priorities which include delivering secure and reliable electricity to enable greater uptake of renewable energy